When it comes to taking a deduction for a loss. Judge Chiechi gives a pointed example of this well-known doctrine in Duquesne Light Holdings, Inc. & Subsidiaries F.K.A. DQE, Inc. & Subsidiaries, 2013 T. C. Memo. 216, filed 9/11/13.

Duque was in the business of lighting up Pittsburgh, PA and environs, but got into the water business, both fresh and waste. However, Duque discovered that water was entirely a waste, and wanted to bail therefrom.

Duque had used an indirect, wholly-owned subsidiary, with which it reported on a consolidated basis, named AquaSource, Inc., to conduct its watery dealings. Using a wholly owned direct subsidiary, Duque funneled cash and Duque stock into AquaSource and took back AquaSource stock.

Then, after the water business was under water, Duque unloaded some of its AquaSource stock to Lehman Bros. Holding for a pittance, representing money that Duque owed Lehman for other services, and took a girnormous loss. Duque carried back the loss and got a $35 million refund.

Then Duque sold off the assets of AquaSource and claimed another ginormous loss.

IRS, ever the spoilsport, shoots down Loss Number 2 thus: “Since the consolidated group recognized a loss on the… disposition of approximately 4% of the AquaSource stock, which loss was attributable to the fact that there was built-in loss in the underlying assets of AquaSource, the consolidated group is not permitted to take the duplicative losses when the underlying assets were sold in 2002 and 2003. Accordingly, the portion of the asset sale losses that are duplicative (determined by application of a ratio consisting of the loss claimed on the stock sale over the potential duplicative loss… against the losses claimed per asset sale) should be disallowed by application of the doctrine of Charles Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934).” 2013 T. C. Memo. 216, at p. 11.

In other words, the price of the stock was depressed by the value (or lack thereof) of AquaSource’s assets. That depressed price permitted Loss Number One, and that’s all you get, Duque, so when you unloaded the assets themselves, no more losses. And the stock “sale” was a payoff to Lehman Bros Holding.

While Duque’s case was wending its way through Tax Court, Tax Court decided Thrifty Oil Co., 139 T. C. 198 (2012). As Gerdau Macsteel was decided the same day (8/30/12; see my blogpost “MacSteal”, 8/30/12), Thrifty Oil evaded my eagle eye, so I have no blogpost to point to.

Thrifty holds you can’t double-dip if you’re a consolidated group, and Duque filed a brief amicus therein. So Judge Chiechi asks Duque and IRS to file briefs stating why Thrifty does or doesn’t settle Duque’s case.

They do, and it does. Notwithstanding Duque’s arguments, which duplicate those in their amicus brief in Thrifty, unless you can show an explicit statutory provision allowing a double deduction, once is enough.

And some Third Circuit learning on which Duque relies expressly provides that the Ilfeld “double-dip” rule applies expressly to corporations reporting on a consolidated basis. In a consolidated group, if all members gain, the tax is the same. But where one gains and another loses, the loss cannot already have been taken by a member of the group. Duque’s argument that Section 165 permits the double-dip loses, because Section 165 is a general provision allowing losses to be deducted, doesn’t get it either; it isn’t specific to this kind of case.

Enough.